10.4 Strategies to Mitigate Risks

The impact of any of the political risk events on a firm is unlikely to be localized, short-lived or isolated; it may ripple across the entire company and even the whole supply chain. How can a company prepare for a political risk?

Due Diligence

The first step to address and mitigate political risk is to have an ongoing political risk analysis and research plan. This process is known as completing “due diligence.” Speaking to local export agencies is an important element of analyzing political risk. For example, the EDC and the Canadian Trade Commissioner Service have experts on the ground in most emerging markets and can help Canadian companies identify political risks and develop contingency plans.

Developing Relationships with Governments In the Target Market

There is value in developing relationships with key decision-makers in the target market. These relationships can be developed directly – through travelling and face-to-face meetings through an intermediary or through hiring local individuals. These relationships are critical to the success of the venture in the international market. Government officials can be helpful in explaining trade policies, and they are excellent sources of information regarding upcoming changes in government policies and regulations.

Involving Key External Stakeholders

If possible, having suppliers, customers, agents, and any other key stakeholders involved in political risk mitigation can help organizations develop better contingency plans and coordinate risk response.

Adjusting Operational and Financial Policies

A review of internal policies and procedures is extremely important in managing political and legal risks for a number of reasons:

• To ensure internal policies are in line with and do not contradict legislation and employment practices in the target market.
• To address the conflict of interest and the potential of corruption – organizations must adjust routine procedures and develop their ethics and code of conduct policies to align with those of their international market.
• To create a linkage with the local community and make sure to respect, protect and even improve the local community. This may require developing training programs for the staff to assist them in adjusting to the new working environment.

Intellectual Property (IP) Protection

The first and most important step an organization can take in protecting its intellectual property is to establish contractual security. There are certain features inserted into legal contracts that can protect intellectual property, and they are:

• Non-disclosure – ensures that all sensitive information related to technology transfers, licenses, and other business-related agreements will not be shared or available to parties other than those listed in the contract (Twin, 2024).
• Clear ownership clause – ensures that the party entitled to the intellectual property is clearly defined without dispute, this prevents all other parties from making a legal claim to that property (Chen, 2023).

Acquire Political Risk Insurance

An organization may decide to transfer risk to an outside party by acquiring political risk insurance. By doing so, they can safeguard the value of overseas assets, protect access to foreign-held funds and maximize the potential of foreign investment.

References

Twin, A. (2024, February 23). Non-disclosure agreement (NDA) explained, with pros and cons. Investopedia. https://www.investopedia.com/terms/n/nda.asp

Chen, J. (2023, June 21). Clear title: Definition and importance in real estate. Investopedia. https://www.investopedia.com/terms/c/clear-title.asp